Annual Report 2015The contents of this Report encompass the requirements of Section 4 of the Bank of England Act 1998, which include (1) a report by the Oversight Committee on the matters for whichit is responsible (S4(2)(a)), including a review of the Banks performance in relation to its objectives and strategy (S4(3)); (2) a report by the Court of Directors on the activities of the Financial Policy Committee of the Bank (S4(2)(aa)); (3) a statement of the Banks objectives and strategy for the next year, as determined by the Court (S4(4)(b)); and (4) a statement of the rates at which Non-executive Directors of the Bank have been remunerated (S4(4)(a)).The Prudential Regulation Authority has published a separate report as required by Paragraph 19 of Schedule 1ZB of the Financial Services and Markets Act 2000, and in accordancewith the requirements of the Companies Act 2006.The Bank has also published a separate report, as required by section 203B of the Banking Act 2009 and paragraph 33 of Schedule 17A of the Financial Services and Markets Act 2000,on its supervision of nancial market infrastructures.Bank of EnglandAnnual Report 20151 March 2014 to 28 February 2015Presented to Parliament by the Chief Secretary to the Treasuryby Command of Her Majestywww.bankofengland.co.ukOverviewOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeCourt, and the Banks policy committeesFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statements Now know ye, that we being desirous to promotethe publick Good and Benet of our PeopleCharter of the Bank of England, 1694Bank of England Annual Report 2015iiiContentsOverviewOne Mission, One BankivStatement by the Chairman of Court1Report by the Governor3Court, and the Banks policy committees7The Court of Directors8Policy committees 10Monetary Policy Committee (MPC) 10Financial Policy Committee (FPC)11Board of the PrudentialRegulation Authority (PRA) 12Organisational structure14Review of 2014/1516Financial review 2014/1554Risk management and business practices62Corporate social responsibility68Report of the Remuneration Committee74Report of the Oversight Committee 82Report of the Audit and RiskCommittee (ARCo)89Statement of the responsibilitiesof the Court of Directors in relation to the nancial statements 93Financial statementsReport of the Independent Auditor94Banking Department statementof income96Banking Department statementof comprehensive income97Banking Department statementof nancial position98Banking Department statementof changes in equity99 Banking Department statementof cash ows100Notes to the Banking Departmentnancial statements101Issue Department account151Issue Department statementof balances152Notes to the Issue Departmentstatements of account153Contacting the Bank of England156www.bankofengland.co.ukOverviewOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeCourt, and the Banks policy committeesFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsiv Bank of England Annual Report 2015OverviewOne Mission, One BankThe Bank of Englands mission is to promote the Good of the People of the United Kingdom by maintaining Monetary and Financial Stability.One BankMaximising our impact by working togetherOpen andAccountableWe are understood, credible and trusted, so that our policiesare effective.Transparent,independent andaccountable tostakeholders, withefcient and economicdelivery of our policiesand actions.AnalyticExcellenceWe are at theforefront of researchand analysis as a necessary part of our policies and actions.Making creative use of the best analytical tools and data sourcesto tackle the mostchallenging andrelevant issues.OutstandingExecutionOur decisions and actions have inuence and impact, both at home and abroad.Co-ordinated, effective and inclusive policy decisions and reliable, expert execution in everything we do.We attract and inspire the best people to public service, reecting the diversity of the United Kingdom.Valuing diverse ideas and open debate,while developing and empoweringpeople at all levels to take initiative andmake things happen.Diverse and TalentedPromoting the Good of the People of the United Kingdom by maintaining Monetary and Financial StabilityBank of England Annual Report 20151With the Banks Strategic Plan taking root, the organisation has seen considerable change. But we are very much at the beginning of a journey. The Bank aspires to the highest professional standards in ethics and management practices. And, as I approach my rst anniversary as Chairman of Court (as the Banks Board is known), it is a pleasure to be playing my part in helping the institution to realise these ambitions. The role of ChairmanAs Chairman, my job is to ensure that there is a robust, independent, well-functioning Board. Any successful Board requires a high level of mutual trust and respect between all the Directors. In part, that rests on a good relationship between the Chairman and the Chief Executive. In Mark Carney, the Bank is fortunate in having a high-calibre Governor (its Chief Executive) who is providing strong leadership right across the institution. I have very much enjoyed working alongside him and his colleagues. A successful board also maintains effective relationshipswith its shareholders. And I am grateful toHM Treasury for its continuing support ofthe work of the Bank and its mission. Court as a unitary BoardRecently, Court has been through a series of reforms. Much has changed for the better Court is smaller, more focused and clearer onits responsibilities. To all intents and purposes,it now acts as a unitary Board, with executivesand non-executives working together for the long-term good of the business and its ultimate shareholders, the people of the United Kingdom. But there is still more that could, and in my view should, be done. The Banks December 2014 statement on transparency and accountability proposed a number of further reforms to Court that would, I believe, improve its effectiveness as a unitary Board.1 Those included a further modest reduction in Courts size, as well as ending the distinction between Court and its statutory sub-committee of Non-executive Directors (known as the Oversight Committee). Transparency and accountabilitySince the middle of last year, the Bank has announced a series of transparency and accountability initiatives. Those have included wide-ranging reforms in monetary policy(page 20), as well as improvements in the transparency of Court. The archive proceduresfor Courts historical minutes have been brought in line with Whitehall best practice (page 51). And Court also decided to release the minutes of its meetings in the 200709 nancial crisis period. This Annual Report contains further changes in this regard, including, for the rst time, reports from the Banks Audit and Risk Committee(page 89) and on corporate social responsibility (page 68). The Bank is also providing more transparency about its nancial statements(page 90). Professionalising the Bank Core to the Banks mission is excellence not only in policy analysis and design, but also in policy execution and professional standards. Quite rightly, the institutions senior management have emphasised the need for the Bank, as a business, to professionalise its management practices and learn from the best elsewhere. There have been some encouraging developments, including the recent work on the Banks approach and attitude to risk (report on risk management and business practices, page 62), and considerable progressin professionalising its approach to talent management and succession planning (page 45). There is, however, still more to do, both in the areas mentioned above, and more generally inthe realm of professional standards. For example, the independent review into the RTGS outage (page 36) pointed to the scope for strengthening The past year has been one of transition and change for the Bank as it seeks to be at the forefront of international best practice in all that it does. Anthony HabgoodChairman of CourtStatement by the Chairman of CourtOverview1 See www.bankofengland.co.uk/publications/Documents/news/2014/warshresponse.pdfwww.bankofengland.co.ukOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeCourt, and the Banks policy committeesFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOverviewOne Mission, One BankReport by the GovernorStatement by the Chairman of Court2 Bank of England Annual Report 2015Last summer, Sir David Lees stepped down as Chairman, Sir Charles Bean retired as Deputy Governor for Monetary Policy, and Lady Rice and Sir Roger Carr both came to the end of their terms as Non-executive Directors. On behalfof Court, I would like to thank them all for their dedicated service to the Bank. I am delighted that Bradley Fried has stepped up to be Deputy Chairman of Court and Chairman of the Banks Audit and Risk Committee and John Stewart has taken on the role of Chairman of the Remuneration Committee and senior independent director. We have also seen a number of new Court Directors Ben Broadbent has replaced Charles Bean, while Dido Harding, Don Robert and Dorothy Thompson have joined as non-executives. Minouche Shak, Deputy Governor for Markets and Banking, also attends Court meetings, and will become a full member of Court once the relevant legislation has been changed. Court has become more diverse than ever before, a development that is most welcome. Once Minouche Shak becomes a full member, three Court Directors will be female. In addition, Charlotte Hogg, as the Banks Chief Operating Ofcer, attends all meetings. These recent appointments demonstrate the Banks ongoing commitment to diversity at the highest level. Outlook The coming year will be another year of transition and change as the Bank continues the transformation set out in its Strategic Plan, the professionalisation of its management practices and, more generally, its drive to ensure that it is world-class in all that it does. Those ambitions have my whole-hearted support, and are integral to the institutions mission to promote the good of the people of the United Kingdom.10 June 2015the Banks crisis management framework.And the investigations of the past year have underscored the importance of the exemplary ethical standards that the Bank has laid downin its enhanced Code and of the new central compliance function. Conduct and ethicsA key aspect of my job as Chairman is to setthe right tone in terms of culture, standards and ethics. And one of the most important issuesI have had to consider has been the potential implications for the Bank of the various misconduct investigations being carried out by the Financial Conduct Authority (FCA) and other regulatory bodies. In November 2014, Lord Grabiner QC published an independent report into allegations thatBank staff had been aware of the potential for manipulation in the foreign exchange markets (page 38).2 The report was thorough and comprehensive. It set out recommendations to improve processes at the Bank. And theBank, rightly, undertook to implement all ofLord Grabiners recommendations in full. Early in this work, other records came tolight relating to the Banks liquidity auctions in 2007/08. On the recommendation of counsel, these were referred to the Serious Fraud Ofce. These developments have been distressing and uncomfortable. But rigorous and transparent follow-up is essential if the Bank is to maintain its integrity and to keep the trust of the public. Critical to this trust will also be the proper implementation of the enhanced Code and compliance function outlined in the Corporate Social Responsibility Report. Court compositionDiversity of thought, experience and background are essential pre-requisites for a successful Board, and the Banks Court has recently seen numerous changes in its composition. Overview2See www.bankofengland.co.uk/publications/Documents/news/2014/grabiner.pdfBank of England Annual Report 20153The One Bank plan set out an ambitious three-year vision for discharging the enormous new responsibilities bestowed on us following the global nancial crisis. The plan dened a unied, diverse and talented institution; onethat delivers excellent analysis and outstanding execution; and that is transparent and accountable to Parliament and the public. I am delighted to report that the initiatives putin place over the past year are already making a huge difference to the Banks ability to deliver our mission of promoting the good of the people of the United Kingdom. These achievements would not have been possible without my colleagues, whose hard work and dedication make possible the reforms that are creating a Bank of England t for the 21st Century. I want to take this opportunity to thank them for their extraordinary efforts to full our policy remits while transforming this institution.In 2014 we achieved a huge amount across each of the pillars of the One Bank plan. We have harmonised our staff terms and conditions across the Bank; implemented a new talent strategy; and embedded targets for diversity. These measures will help attract and retain talented individuals, and they will help colleagues build exciting careers across the organisation. We have launched an integrated Bank-wide research function to improve our analysis of the most important issues facing the Bank, using our expertise to undertake cutting-edge research to inform our policy decisions.We have taken a number of steps to professionalise the Bank including establishing an Independent Evaluation Ofce to assess the delivery of our objectives; and setting out ina Charter how the Bank will collect and use market intelligence. We have responded to failures of our infrastructure and to troubling instances where our conduct has not met the high standards the public justiably expect of the Bank. We have addressed the challenge, quickly dealt with comprehensive processes that draw on independent evaluations and advice, and we have learned lessons and taken swift and decisive actions to address shortcomings. As a consequence of these efforts we are overhauling how we conduct market intelligence, manage internal documents and information, and escalate concerns about market conduct. We have delivered a revolution in the Banks transparency. For the rst time MPC minuteswill be released alongside interest rate decisions, ending the drip-feed of information and allowing markets, businesses and the public to understand the MPCs decisions immediately after they are made. We also committed to publishing, with appropriate lags, the transcripts and the audiotapes of those MPC meetings. We are publishing past Court minutes, including those which cover the key years of the nancial crisis. We have taken steps to include the public in the design of our banknotes. A panel of independent experts will consider suggestions made by the public to ensure the money in our pockets representsthe preferences of the people. We have established a new International Directorate to bring together the Banks expertise, ensuring we act as one organisation to maximise our effectiveness on the global stage.Throughout this period of considerable change within the Bank, the economic and nancial backdrop has continued to pose many challenges. In the rst year of our Strategic Plan, we have made great progress towards our goal of building One Bank an institution that fully exploits the synergies of having monetary policy, macroeconomic policy and microprudential regulation under the same aegis.Mark CarneyGovernorOverviewReportby the Governorwww.bankofengland.co.ukOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeCourt, and the Banks policy committeesFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOne Mission, One BankReport by the GovernorOverviewStatement by the Chairman of Court4 Bank of England Annual Report 2015UK output growth remained solid and unemployment has continued to fall. As we expected, the margin of slack in the economy has narrowed. The UK, like many countries, has experienced weak ination in large part because of falls in global commodity prices. But with the UK economy expanding steadily, ination is likely to pick up once these falls drop out ofthe annual comparison. The MPCs actions have been consistently aimed at bringing ination back to target within two years, and explaining that in order to achieve that goal, interest rates are likely to be raised in a more limited and gradual fashion than in the past.The Bank has been at the forefront of international efforts to nish the job of xing the fault lines that caused the last crisis. Through the Financial Stability Board we have helped the G20 countries achieve a watershed in ending too big to fail so that future taxpayers will not face the burden of bank failure. The PRAs work has continued apace, as the UK implements a new regime for holding individuals to account for their actions; to align more closely risk with reward; and as our insurance industry prepares for the advent of Solvency II in 2016. Following the FPCs review the Government legislated to grant the FPC powers of direction with regards to a leverage ratio framework forthe UK.As a forward-looking central bank we have remained vigilant to prospective risks to nancial and price stability in the UK and beyond. Concern about developments in household indebtedness prompted the FPC to put in place measures to safeguard underwriting standards and limit increases in high loan-to-income lending, designed to prevent an erosion of standards that could pose broader macroeconomic risks. OverviewThe economic context means it has never been so important for the Bank to take a unied approach: using our policy tools in concert to respond to challenges across our objectives.The FPC measures helped ensure that monetary policy could concentrate on its primary responsibility of maintaining price stability.The stress tests undertaken by the FPC and PRA showed clearly the benets of bringing together microprudential assessments of banks with a macro perspective on risks to which the sector must be resilient. The results demonstrated the improved strength of our banking system. Building on these important steps in 2014, we will continue the process of strengthening and professionalising the Bank. My fellow governors and I are unwavering in our commitment to a central bank that serves the public with resilient infrastructure, transparent processes and unimpeachable integrity. And having addressed the key fault lines that caused the crisis, we must now broaden our efforts to address new and evolving risks. InJune we published the conclusions of the Fair and Effective Markets Review, which looks to restore trust in wholesale nancial markets in the wake of a number of high prole abuses.2014 was another important year for the Bank and this current year stands to be no different. As a forward-looking central bank our work is never nished, but our focus is constant: to promote the good of the people of theUnited Kingdom. 10 June 2015www.bankofengland.co.ukOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeCourt, and the Banks policy committeesFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOne Mission, One BankStatement by the Chairman of CourtOverviewReport by the GovernorBank of England Annual Report 201579Court met ninetimes during the year Attendance at Court meetings is given on page 873A Report from the Oversight Committee is at page 82.4 www.bankofengland.co.uk/publications/minutes/Pages/court/default.aspx5 www.bankofengland.co.uk/about/Documents/matters122014.pdfCourt delegates the day-to-day managementof the Bank to the Governor and through him to other members of the executive. But it reserves to itself a number of key decisions, including: the Banks strategy and objectives; the Banks (including the PRAs)expenditure budget; major capital projects; the Banks nancial framework; the Banks risk management policies; approval of the accounts and the appointment of auditors; the remit for managing the Banksbalance sheet; senior appointments within the Bank; major changes in staff remuneration and pension arrangements; the Banks succession plan; andthe establishment of sub-committeesof Court, their terms of reference and membership.Apart from the statutory Oversight Committee, the major subcommittees of Court are theAudit and Risk Committee, the Remuneration Committee and the Nominations Committee. Terms of reference of these and other Committees are published on the Banks website.5Members of Court have been indemnied bythe Bank against personal civil liability arising out of the carrying out or purported carryingout of their functions, provided they haveacted honestly and in good faith and havenot acted recklessly. These indemnitieswere rst granted in 2000 and approved byHM Treasury in accordance with the practiceof the Government in relation to board members of Non-Departmental Public Bodies.The Banks framework for governance and accountabilityis set by the Bank of EnglandAct 1998. The Court of Directors acts as a unitary Board, with executive and non-executive members and an independent non-executive chairman.It sets the Banks strategy and budget and takes key decisions on resourcing and appointments; and, with the Oversight Committee,3 keeps the Banks performance and nancial management under review. The Court meets at least seven times a year, and its minutes are published.4Members of Court are appointed by the Crown, for periods of eight years in the case of the Governor, ve years for the Deputy Governors, and up to four years for the Non-executive Directors. One of the latter is designated bythe Chancellor of the Exchequer to chair Court. Court, and the Banks policy committeeswww.bankofengland.co.ukCourt, and the Banks policy committeesThe Court of DirectorsMonetary Policy Committee (MPC)Financial Policy Committee (FPC)Board of the PrudentialRegulation Authority (PRA)Policy committeesOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOverview8 Bank of England Annual Report 2015Non-executive DirectorsAnthony HabgoodChairman of Court Appointed1 July 2014Term expires on30 June 2018 Chairman,RELX Group plc Chairman, Preqin Holding Limited Chairman, Norwich Research Partners LLP Visiting Fellow, Oxford UniversityMichael Cohrs Appointed21 June 2011 Term expires on31 May 2015Advisor, EQT Advisory Board, British Airways Fellow, Cambridge University Non-executive Director,SurfCast IncBradley Fried Appointed1 June 2012 Term expires on31 May 2019 Managing Partner, Grovepoint Capital LLP Non-executive Director, Investec plc and Investec Limited CEO in Residenceat Cambridge Universitys Judge Business School Fellow of Magdalene College, CambridgeTim Frost Appointed1 June 2012 Term expires on31 May 2018 Non-executive Director,Cairn Capital Member of Court and Council, London Schoolof Economics Non-executive Director, LSE Enterprise Non-executive Director, MarkitDave Prentis Appointed1 June 2012 Term expires on31 May 2019 General Secretaryof UNISONMember ofthe TradesUnion CongressExecutive Council Member of the Labour Party Joint Policy Committee Vice-President of the European Public Services Union President of Public Services International Commissioner ofUK Commissionfor Employmentand Skills President of Unity Trust BankBaroness (Dido) Harding of Winscombe Appointed1 August 2014 Term expires on31 July 2018 Chief Executive, TalkTalk Telecom Group plcTrustee of Go On UK, The Digital Skills Alliance Life Peer taking the Conservative Whip Member of the Jockey ClubThe Court of Directorsas at 28 February 2015Court, and the Banks policy committeesBank of England Annual Report 20159Governor/Deputy GovernorsDorothy Thompson Appointed1 August 2014 Term expires on31 July 2018 Chief Executive, Drax Group plc Chairman, Drax Power Limited Chairman, Haven Power Limited Non-executive Director, Johnson Matthey plc Chairman, The Sustainable Biomass Partnership LimitedNon-executive Director, Energy UK Mark Carney Governor Chairman, Financial Stability BoardFirst Vice-Chair, European Systemic Risk BoardMember, Groupof ThirtyMember, Foundation Board, World Economic Forum Sir Jon Cunliffe Deputy Governor, Financial Stability Member, G20 Financial Stability Board Steering CommitteeMember, European Systemic Risk BoardMember, BIS Board Ben Broadbent Deputy Governor, Monetary Policy Alternate, ECB General CouncilMember, OECD Working Party No.3Andrew Bailey Deputy Governor, Prudential Regulation Board Member, Financial Conduct AuthorityManagement Board Member, European Banking AuthorityBoard of Supervisors, European Banking Authority and European Insurance and Occupational Pensions AuthorityDon Robert Appointed1 August 2014 Term expires on31 July 2018 Chairman,Experian plc Chairman, Achilles Group Limited Non-executive Director, Compass Group plc Director and Trustee, National Education and Employer Partnership Taskforce Visiting Fellow, Oxford UniversityJohn Stewart Appointed1 December 2009 Term expires on30 November 2015 Chairman,Legal and General Group plc Chairman,The Guide Dogsfor the Blind Association Chairman, Southern Cross Stud Non-executive Director, Boardof the Financial Reporting CouncilCourt, and the Banks policy committeesFind out more onlinewww.bankofengland.co.ukwww.bankofengland.co.ukThe Court of DirectorsMonetary Policy Committee (MPC)Financial Policy Committee (FPC)Board of the PrudentialRegulation Authority (PRA)Policy committeesOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOverviewCourt, and the Banks policy committeesCourt, and the Banks policy committees10 Bank of England Annual Report 2015Policy committeesMonetary Policy Committee (MPC) MembersTop row, left to right Mark Carney GovernorBen Broadbent Deputy Governor,Monetary Policy Sir Jon Cunliffe Deputy Governor,Financial StabilityMinouche Shak Deputy Governor,Markets and BankingAndy Haldane Executive Directorand Chief Economist Bottom row, left to right Kristin Forbes External member Term: 1 July 2014 30 June 2017 Ian McCafferty External member Term: 1 September 2012 31 August 2015David Miles External member Term: 1 June 2009 31 August 2015 Martin WealeExternal member Term: 1 August 2010 31 July 2016The Bank of England Act 1998 establishes the MPC as a committee of the Bank and sets a framework for its operations. The Banks monetary policy objectives underthe Act are to: maintain price stability; and, subject to that, to support the Governments economic policies, including its objectives for growth and employment.At least once a year, the Government species its price stability target and its growth and employment objectives. The MPC is responsible for achieving those objectives. In March 2015, the Chancellor the Exchequer re-conrmedthe ination target as 2 per cent as measuredby the twelve-month increase in the Consumer Prices Index. The economic policy objectiveof the Government was to achieve strong, sustainable and balanced growth sharedmore evenly across the country andbetween industries. The MPC has nine members. Five are Bank Governors and ofcials and four are external members appointed by the Chancellor.An HM Treasury observer attends its meetings. The Committee meets at least once a month to set policy. The MPCs decisions are announced after each meeting and the minutes are published two weeks later. The Banks quarterly Ination Report includes the MPCs projections for ination and output. To improve the transparency of MPCdecision-taking, the arrangements formeetings and publication of minutes are currently undergoing revision following the Report by Governor Warsh.66See 2014/15 Review, page 20and www.bankofengland.co.uk/publications/Documents/news/2014/warshresponse.pdfBank of England Annual Report 201511Court, and the Banks policy committeesFind out more onlinewww.bankofengland.co.ukFinancial Policy Committee (FPC) Members Top row, left to right Mark Carney Governor Andrew Bailey Deputy Governor,Prudential Regulation and Chief Executive of the PRA Ben Broadbent Deputy Governor,Monetary Policy Sir Jon Cunliffe Deputy Governor,Financial StabilityAlex Brazier Executive Director,Financial Stability Strategyand Risk Bottom row, left to right Dame Clara Furse External member Term: 1 April 2013 31 March 2016Donald Kohn External member Term: 1 April 2013 31 March 2018Richard Sharp External member Term: 1 April 2013 31 March 2016Martin Taylor External member Term: 1 April 2013 31 March 2018 Martin WheatleyChief Executive,Financial Conduct AuthorityThe Bank has an overarching statutory Financial Stability Objective to protect and enhance the stability of the nancial system of the United Kingdom.The FPC contributes to the achievement of this objective by: identifying, monitoring and taking actionto reduce risks to the nancial system; and, subject to that, supporting the Governments economic policies, including its objectives for growth and employment.The FPC also advises Court on the Banks Financial Stability Strategy.At least once a year, the Government mustmake recommendations about the FPCs responsibilities for nancial stability and also about its growth and employment objectives. The FPC must respond formally to these, and provide reasons if it proposes not to followthe recommendations.7The FPC consists of eleven members. Fiveare Bank Governors and ofcials, and six are external members the Chief Executive of the Financial Conduct Authority, four members appointed by the Chancellor and a non-voting member from HM Treasury. The Committee meets at least quarterly. It may give Directions to the PRA and the Financial Conduct Authority in relation to macroprudential measures prescribed by secondary legislation under the Bank of England Act 1998. The FPC also has powers to make Recommendations to any other body. It publishes a record of its formal policy meetings and is responsible for producing the twice-yearly Financial Stability Report.The FPC is currently a Committee of Court. In December 2014, as part of its Transparency and Accountability initiative,8 the Bank proposed that the FPC should become a Committee ofthe Bank, like the MPC, and that the Deputy Governor for Markets and Banking should become an ex-ofcio member, balanced bya further external member.7 The 2015 remit is at www.bankofengland.co.uk/nancialstability/Documents/fpc/letters/chancellorletterfpc180315.pdf And the FPCs response is at www.bankofengland.co.uk/nancialstability/Documents/fpc/letters/governorletter260315.pdf8www.bankofengland.co.uk/publications/Documents/news/2014/warshresponse.pdfThe Court of DirectorsMonetary Policy Committee (MPC)Financial Policy Committee (FPC)Board of the PrudentialRegulation Authority (PRA)Policy committeesOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOverviewCourt, and the Banks policy committeesCourt, and the Banks policy committees12 Bank of England Annual Report 2015Board of the Prudential Regulation Authority (PRA) Members Top row, left to right Mark Carney GovernorAndrew Bailey Deputy Governor, Prudential Regulation and Chief Executive of the PRASir Jon Cunliffe Deputy Governor,Financial StabilityMinouche Shak Deputy Governor,Markets and Banking Middle row, left to right David Belsham Independent member Term: 1 May 2015 30 April 2018Sandy Boss Independent memberTerm: 1 September 2014 31 August 2017Iain Cornish Independent member Term: 20 February 2013 Resigned March 2015Charles RandellIndependent member Term: 20 February 2013 19 February 2017 Bottom row, left to right Mark YallopIndependent memberTerm: 1 December 2014 30 November 2017Martin WheatleyChief Executive, Financial Conduct AuthorityThe PRA is the UKs prudential regulator for banks, building societies and credit unions (collectively known as deposit-takers), insurers and major investment rms. The PRAs objectives are set out in statute, principally the Financial Services and Markets Act 2000 (FSMA), and include: a general objective to promote the safetyand soundness of the rms it regulates; and an objective specic to insurance rms, to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policyholders.A further, secondary objective was introduced by the Financial Services (Banking Reform) Act 2013. It requires that the PRA must so far as is reasonably possible act in a way which, asa secondary objective, facilitates effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities. This competition objective came into force on 1 March 2014. The PRA is constituted as a subsidiary of the Bank,9 and its most signicant supervisory decisions are taken by the Board, which the Governor chairs. The PRAs strategy is set byits Board, consulting Court, and it publishesa separate Annual Report on the discharge of its functions. The PRA Board consists of the Governor, the Deputy Governor for Financial Stability, the Deputy Governor for Prudential Regulation,the Deputy Governor for Markets and Banking and the Chief Executive of the Financial Conduct Authority. Further members are appointed by Court with HM Treasurys approval. A majority of the Board must be independent of the Bank.9The Bank has proposed thatthe PRA should cease to be a subsidiary and be fully integrated into the Bank, although the responsibilities of the Board in relation to the PRAs objectives would be unchanged; see page 51. Monetary Policy Committee (MPC)Financial Policy Committee (FPC)Board of the PrudentialRegulation Authority (PRA)Organisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOverviewCourt, and the Banks policy committeesThe Court of DirectorsPolicy committees14 Bank of England Annual Report 2015Mark CarneyGovernor(MPC, FPC,PRA Board)Andy Haldane Monetary Analysis and Chief Economist (MPC) Chris Salmon Markets Andrew HauserBanking, Paymentsand Financial Resilience Andrew Gracie Resolution Paul Fisher Supervisory Risk Specialists and Regulatory Operations; Deputy Chief Executive, PRA Alex Brazier Financial Stability Strategy and Risk (FPC) David Rule Prudential Policy Minouche Shak Deputy Governor, Markets and Banking (MPC, PRA Board)Sir Jon Cunliffe Deputy Governor, Financial Stability (MPC, FPC,PRA Board)Ben Broadbent Deputy Governor, Monetary Policy(MPC, FPC) The organisation chart shows how responsibility for individual functions is delegated within the Bank. Membership of the MPC, FPC and PRA Board are also indicated.Organisational structureBank of England Annual Report 2015Organisational structure15Sonya Branch General Counsel Lyndon Nelson UK Deposit-takers Supervision Sam Woods Insurance Supervision Joanna Place Human Resources John Finch Chief Information Ofcer Megan Butler International Banks Supervision Ralph Coates Finance Stephen Brown Internal Audit Andrew Bailey Deputy Governor,Prudential Regulation and Chief Executiveof the PRA (FPC,PRA Board)Charlotte Hogg Chief Operating Ofcer Audit and Risk CommitteeJohn Footman Secretary ofthe Bank Jenny Scott Communications Find out more onlinewww.bankofengland.co.ukwww.bankofengland.co.ukOrganisational structureFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Review of 2014/15Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsCourt, and the Banks policy committeesOverview16 Bank of England Annual Report 2015Review of 2014/1510The Strategic plan was summarised in the 2014Annual Report, pages 1417.The Strategic Plan, adopted by Court in March 2014,10 has proved the driving force behind the work of the Bank this year, and is changing the way that the institution approaches its tasks across the full range ofits responsibilities. Open andAccountableAnalyticExcellenceOutstandingExecutionDiverse and TalentedCollaborative Inclusive Empowering Decisive OpenPromoting the Good of the People of the United Kingdom by maintaining Monetary and Financial StabilityiDiverse and TalentedInitiatives 3. One Bank, Your Reward4. Rewarding excellence and teamwork5. Compelling talent strategyOutstanding ExecutionInitiatives 9. One credible voice in international policy10. Delivering supervision as One Bank11. Execution in core markets12. A safer BankOpen and AccountableInitiatives 13. Enhanced Central Bank transparency14. Accountable15. Engaged and approachableAnalytic ExcellenceInitiatives 6.One Bank research agenda7. New approach to dataand analysis8. One Bank data architectureOne BankInitiatives 1.Open, transparent and agile culture2.Forefront of joint policy decision-makingBank of England Annual Report 201517Review of 2014/15The Strategic Plan seeks to create a single, unied institution, working as One Bank across all its functions, and with a single, timeless mission: promoting the good of the people of the United Kingdom by maintaining monetary and nancial stability. This requires a strong common culture, built from the best of all parts of the Bank, and bringing together the whole of the organisationto support every policy decision. Central to the successful delivery of the Plan are fteen initiatives identied in last years Annual Report (page 15). Much has happened over the past twelve months the Banks new structure and management team has been put in place, and good progress has been made on many of these fteen initiatives. But the Strategic Plan represents much more than a to do list of major projects. It is leading to fundamental shifts in the Banks culture and thinking, guiding not only the initiatives that were identied twelve months ago, but also the Banks response to events during the year.This Review details the progress made on the strategic initiatives identied in the 2014 Annual Report, as well as the work that has been done in the Bank on its policy objectives over thepast twelve months. It covers the highlights of the work in monetary policy (page 19), nancial policy (page 22), and regulatory policy (page 25); in all of these, the One Bank strategy has seen policymakers share and develop analysis on a range of topical issues. The Review also setsout recent developments in the Markets and Banking and International areas, which support the delivery and execution of initiatives across the full breadth of the Banks policy work. The nal section of the Review (page 43) covers the specic steps that the Bank has undertakento strengthen the four pillars that underpin the Strategic Plan: Diverse and Talented; Analytical Excellence; Outstanding Execution; Open and Accountable. These steps include, but are not limited to, the fteen strategic initiatives setout in last years Annual Report (see box, page 18). Highlights include: the material progress made in delivering an integrated One Bank reward framework; the launch of a far-reaching package of accountability and transparency reforms; the establishment of a Research Hub and; the work that has been undertaken to improve the resilience of the Bank to cyber attack. Overall, the Bank is broadly on track to meetthe priorities set out at this time last year. These initiatives illustrate the Banks commitment not only to delivering the Strategic Plan, but also to ensuring that it meets exemplary professional standards across the full range ofits work, essential for the fullment of the institutions mission to promote the goodof the people of the United Kingdom.The One Bank strategy has seen policymakers share and develop analysis on a range of topical issueswww.bankofengland.co.ukStrategic initiativesRegulatory policyInternationalBanking and marketsProtecting our banknotesMonetary policyFinancial policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureReview of 2014/15Court, and the Banks policy committeesOverview18 Bank of England Annual Report 2015Review of 2014/15Strategic initiativesOpen transparent and agile cultureNew values launched page 44Our Code page 68Forefront of joint policy decision-makingNew organisational structure in place page 14PRA/FPC stress tests page 22Joint FPC/PRA work on house prices page 24One Bank Your RewardIntegrated Reward Framework page 43New Bank-wide contract April 2015 page 43Rewarding excellence and teamworkNew performance assessment system page 44360 degree feedback introduced for all managers page 44Compelling talent strategyLaunch of new talent strategy page 45Programme for PhD entrants page 46 Aspirational targets for diversity page 69One Bank research agendaResearch Hub established page 46Research conferences page 46New approach to data and analysisResearch into digital currenciespage 42Data lab openedpage 48One Bank data architectureChief Data Ofcer appointedpage 48One credible voice in international policyFormation of International Directorate page 29Delivering Supervision as One BankPRA and Resolution implementation of BRRD page 28Joint work on Recovery and Resolution Plans page 28Execution in core marketsAccess to Sterling Monetary Framework page 32Improvements in ELA readiness page 85Market Intelligence charter page 39Polymer banknotes page 40A safer BankRevamp of risk management framework for the Bank page 62Launch of central compliance function page 68 Chief Information Security Ofcer appointed page 49Cyber strategy agreed page 49Enhanced central bank transparency Warsh Review page 20Banknote Character Advisory Committee page 41Transparency of Court documents page 51AccountableImprovements in Court governance page 50Creation of Independent Evaluation Ofce page 82Grabiner Reviews pages 38 and 84RTGS Review page 36Engaged and approachable Social media initiative page 52Bank of England Annual Report 201519The Banks commitment to analytical excellence, and to harnessing the synergies from having monetary policy, macroprudential policy and microprudential supervision within a single institution, have underpinned the work of the MPC and the Monetary Analysis area over the past year. All members of the MPC, FPC and PRA Board have access to shared information and can, and do, attend each others staff briengs. They also have joint meetings on topics of mutual concern. Staff from across the Banks policy areas worked together on a number of analytical issues over the year, including developments in the UK housing market; the possible effects on the supply of credit of any further downward adjustments in Bank Rate; and the potential macroeconomic and nancial repercussions of the halving ofthe oil price seen in the second half of 2014. The analysis supporting the MPC, and the rationale for the MPCs decisions, are set out more fully in the Minutes of the Committees policy meetings and its Ination Reports. In the coming year, the MPC will continue to evaluate the appropriate monetary stance inthe light of evolving prospects for the economy, and will draw on expertise from across the Bank in doing this. Further joint meetings betweenthe Banks policy committees are planned. Andas with the Banks other policy areas, the MPC will benet from the insights of the One Bank Research Hub (page 46), as well as the Banks investment in its data capabilities (page 48). Forecasting is an important part of the MPCs processes. The Banks Independent Evaluation Ofce was requested to put a work programme in train aimed at providing Court with a better basis for evaluating the Banks forecasting performance (page 84). Monetary policy Recent developments and the year aheadInation has been below the MPCs 2% target, in large part reecting the sharp drop in the global price of oil. In February and May 2015 as required by the MPCs remit whenever ination is more than one percentage point away from the 2% target the Governor wrote an open letter to the Chancellor of the Exchequer. The letter set out recent developments in, and prospects for, ination. Since the beginning of 2015, CPI ination has been close to 0% and it is anticipated that ination will remain subdued for much of the year. Ination is likely to rise notably around the turn of the year, however, as past falls in energy, food and other import prices drop out of the annual rate. The MPC judges that it is currently appropriate to set policy so that it is likely that ination will return to 2% target within two years. Conditional on the Bank Rate following the path currently implied by market yields such that it rises gradually over the MPCs forecast period that is judged likely to be achieved. Chart 1: Recent developments in inationReview of 2014/152%Ination has been below the Monetary Policy Committees2% targetNote: The red diamonds show Bank staffs central projection for CPI ination in January, February and March 2015 at the time of the February Ination Report. The blue diamonds show the staff projection for April, May and June 2015. The bands on either side of the diamonds show uncertainty around these projections based on one root mean squared error of projections for CPI ination one, two and three months ahead made since 2004. Source: Bank of England Ination Report, May 2015. www.bankofengland.co.ukStrategic initiativesRegulatory policyFinancial policyInternationalBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/1520 Bank of England Annual Report 2015The MPC has announced a series of reforms aimed at putting the Bank at the forefront of international best practiceReview of 2014/15Monetary policy and transparencyThe Bank was an early leader in the eld of monetary policy transparency, and the Strategic Plan reiterated the institutions commitment to openness and accountability in all parts of its work, including policy communications. In April 2014, the Bank asked Governor Kevin Warsh, formerly of the US Federal Reserve Board of Governors, to conduct a wide-ranging reviewof the MPCs transparency practices. Following that Review, the MPC has announced a seriesof reforms aimed at putting the Bank at the forefront of international best practice in the realm of policy transparency. The Warsh Review and the newMPC timetableAt the Banks request, Governor Kevin Warsh, formerly of the US Federal Reserve Boardof Governors, reviewed the MPCstransparency practices. The Warsh Review was published inDecember 2014. The Review made a number of recommendations to improve effective transparency and genuine accountability. These included: providing more, and more timely, information about monetary policy decisions; releasing transcripts of that part of the MPC meeting where policy is decided with a deferral period of between ve and ten years; releasing key staff brieng materials alongside the transcripts with the same deferral lag; and, strengthening archive arrangements. The MPC agreed with the Warsh recommendations, and additionally identied scope to go further in promoting transparency in a number of areas. So:from August 2015, the MPC will be releasing its policy announcement, its Ination Report and the minutes of its policy meeting all on the same day an initiative intended to deliver a materialstep forward in effective transparency; from 2016, four of the MPCs 12 regular brieng meetings will be joint with the FPC to allow discussion on topics of mutual interest. And while the MPC will continueto meet at least monthly, as required by statute, the new timetable will provide scope for a move to at least eight meetingsa year in the event of legislative change; andthe Bank began transcribing those partsof the MPC meetings at which policy is decided in March 2015. Those transcripts will be released, alongside key staff brieng materials, after an eight-year delay. www.bankofengland.co.ukStrategic initiativesRegulatory policyFinancial policyInternationalBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/1522 Bank of England Annual Report 2015Sources: Participating banks FDSF data submissions,Bank analysis and calculations.Chart 2: Results of the 2014 FPC/PRAstress testsImpact of strategic management actions on low-point CET1 capital ratiosThe 2014 stress scenario was centred on a severe shock in the UK economy and housing market, including sharp interest rate increases, a deep recession, rising unemployment and a 35% fallin house prices. It was designed to be demanding but it was not a forecast it was a coherent, tail-risk scenario. Following the stress testing exercise, the PRA Board judged that, as at end-2013, three of the eight participants needed to strengthen their capital position further. Given continuing improvements to banks resilience over the course of 2014 and concrete plans to build capital further going forward, only one bank was required to submit a revised capital plan. Financial policyOver the past year, the Bank and the Financial Policy Committee (FPC) have continued to work to promote a more resilient nancial system,to deliver the Financial Stability Strategy setout in last years Annual Report11 and thereby to contribute to the Banks objective to protect and enhance the stability of the UK nancial system. UK banks are on a transition path towards greater resilience in advance of regulatory requirements. Over the past year, UK banks leverage and reliance on wholesale funding have fallen.12 Average capital ratios, adjusted for risk, for the largest UK banks are almost double their pre-crisis level. As summarised below, there have been material developments in the capital framework for banks in the UK, with the publication of the joint FPC/PRA stress tests (page 22) and the Leverage Ratio Review (page 23). There have also been a number of other policy developments, for example, in relation to the housing market. Stress testsIn December 2014, the Bank announced the results of its rst annual, concurrent stresstest, conducted jointly by the FPC and PRA Board, of the UK banking system. The stresstest provided a quantitative, forward-looking assessment of the capital adequacy of theUK banking system and individual institutions within it. It brought together expertise from across the Bank, including macroeconomists, nancial stability experts and supervisors. And the stress test played a key role in the capital framework by informing judgements about the appropriate size of capital buffers for individual banks and building societies, and for the system as a whole.Review of 2014/15UK banks are on a transition path towards greater resilience in advance of regulatory requirements11Bank of England Annual Report 2014, page 38. See:www.bankofengland.co.uk/publications/Documents/annualreport/2014/boereport.pdf12 December 2014 Financial Stability Report. See: www.bankofengland.co.uk/publications/Pages/fsr/2014/fsr36.aspxBank of England Annual Report 201523would apply to Global Systemically Important Banks (G-SIBs) and other major UK domestic banks and building societies and (c) a countercyclical leverage buffer (CCLB) to be applied to all rms covered by the minimum leverage ratio requirement. The FPC judged that the minimum leverage ratio management requirement should be set at 3%. This level is consistent with the Basel framework for risk-weighted capital, and is in line with emerging international standards on leverage. The FPC also recommended a supplementary leverage ratio buffer for systemically important rms, and a countercyclical leverage buffer for all rms, to address risks that vary over thecycle. The FPC recommended that these buffers should be calibrated at 35% of those applied in the risk-weighted framework to achieve complimentarity and preserve the relationship between parts of the frameworkas conditions change. On 6 April 2015, the FPC was formally awarded Direction powers over leverage ratio tools. The Committee stated in the leverage review that once it was granted Direction powers it would introduce the minimum level of the leverage ratio of 3% as soon as practicable. Supplementary leverage ratio buffers would be implemented in parallel with the corresponding risk-weighted systemic risk buffers from 2016 for G-SIBs,and from 2019 for other major UK banks and building societies. The CCLB would come into force on the same timescale as the minimum requirement and its level would be reviewed quarterly by the FPC alongside the risk weighted countercyclical capital buffer. Overall, the test results demonstrated thatthe core of the banking system had become signicantly more resilient since the FPCs 2013 capital exercise. The results suggested that the system should be sufciently capitalised to continue to serve households and businessesin the face of adverse shocks. Given this performance, the FPC judged that no system-wide macroprudential actions were requiredin response to the test. Looking ahead, the 2015 stress test willexplore risks arising from a deterioration in global economic conditions. The Bank has also announced its intention to publish an update of its medium-term vision for stress testing laterin the year.Leverage ratioThe leverage ratio is another important component of the UK capital framework. A minimum leverage ratio requirement guards against excessive balance sheet stretch andthe possibility that risk weights may not always be an accurate gauge of the true level of risk. In November 2013, the Chancellor askedthe FPC to conduct a review of the role of the leverage ratio within the capital framework,and to consider the case for the FPC being able to set requirements ahead of the international timetable or to set a higher ratio for UK banks. In October 2014, the FPC published its review, which recommended that it should have the power to direct the PRA to set leverage ratio requirements and buffers for banks, building societies and PRA-regulated investment rms, including (a) a minimum leverage ratio (b)a supplementary leverage ratio buffer that Review of 2014/153%The FPC judgedthat the minimum leverage ratio should be set at 3%www.bankofengland.co.ukStrategic initiativesRegulatory policyFinancial policyInternationalBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/1524 Bank of England Annual Report 2015Review of 2014/15Housing market During the year, the FPC also took important steps to mitigate risks of excessive indebtedness, particularly in relation to the housing market. The recovery in the UK housing market was associated with a marked rise in the share of mortgages extended at high loan to income multiples. At higher levels of indebtedness, households are more likely to encounter payment difculties in the face of shocks to income and interest rates. This could pose direct risks to the resilience ofthe UK banking system, and indirect risks via the impact on the economy of households cutting back expenditure when the unexpected happens. Against that backdrop, the FPC agreed that it would be prudent to take steps to limit the risks posed to nancial and economic stability from an increase in the number of highly indebted households. The Committee made two Recommendations to help insure against this risk. One introduced an interest rate stress into the affordability test already in force since the Mortgage Market Review; the other a cap onthe volume of high loan to income mortgages entered into by mortgage lenders. Following consultations, these were implemented by the FCA and the PRA respectively. The FPC acted early, taking graduated and proportionate steps to reduce the risk of more drastic action being required later. The actions were carefully calibrated so as notto restrain current housing market activity but to bite if sustained momentum in the housing market was accompanied by a further sharp rise in the number of highly indebted households. In that case, the FPCs actions would prevent a slide into riskier lending and higher indebtedness that could undermine economic and nancial stability.The policy will be kept under review and will be adjusted as appropriate as circumstances change.In June 2014, the Chancellor invited the FPCto request additional powers to guard against nancial stability risks in the housing market.In October, the FPC recommended it be given a Direction power that would enable it to require the PRA and the FCA to set limits on loan to value ratios and debt to income ratios for all residential mortgage lending. The Government consulted on the proposed powers in relationto owner-occupied mortgages and the FPC was formally given the new tools on 6 April 2015.Sources: Halifax, Nationwide, Rightmove.co.uk,Royal Institution of Chartered Surveyors (RICS) andBank calculations. (a) Includes the RICS expected house prices three months ahead net balance, the RICS new buyer enquiries less instructions to sell net balances, the RICS sales to stock ratio and the three month on three months earlier growth rate of the Rightmove index of the average asking price trend. All series have been moved forward by three months. The Rightmove index has been seasonally adjusted by Bank staff.Chart 3: Recent developments inhouse pricesDifferences from averages since 2002(number of standard deviations)Near-term indicatorsof house prices (a)(left-hand scale)Average of Halifax andNationwide indices(right-hand scale)Percentage changes three monthson three months earlier2003 05 07 09 11 13 151086420-2-4-6-843210-1-2-34 3 2 1 0 1 2 3 4 10 8 6 4 2 0 2 4 6 8 10 03050709111315 Percentage changes three months on three months earlier Differences from averages since 2002 (number of standard deviations) Average of Halifax and Nationwide indices (right-hand scale) Near-term indicators of house prices(a)

(left-hand scale) + - + - 20 The CCB rate for UK exposures is currently at 0% Bank of England Annual Report 201525Other nancial policy developmentsThere were a number of other notable nancial policy developments over the past year. As required by legislation, the FPC started to setthe Countercyclical Capital Buffer (CCB) at its quarterly meetings this is a macroprudential tool that requires banks and building societies to raise capital ratios as nancial stability threats increase through the cycle. The CCB rate for UK exposures is currently at 0%. The FPC also conducted a review of the regulatory perimeter, in particular of channels through which stress in selected parts of the non-bank nancial system could affect wider UK nancial stability. Based on its assessment and initiatives under way to improve understanding and manage some risks within these sectors,the FPC did not see a case for recommending changes to the regulatory framework but will return to the issue on an annual basis, or sooner, if risks are identied. The work of the FPC over the past year is set out more fully in the FPC Record and the twice-yearly Financial Stability Report. Regulatory policy The Prudential Regulation Authorityand microprudential regulation The PRA is the prudential supervisor responsible for deposit-takers, insurers and major investment rms operating in the United Kingdom. It supervises around 1,700 rms and groups. This includes over 900 banks, building societies and credit unions and nearly 700 insurers of all sizes (general insurers, life insurers, friendly societies, mutuals). The United Kingdom is a major global hub for nancial services and consequently the PRA is responsible for the prudential supervision of several global nancial institutions.The PRAs role is dened by three statutory objectives: i) to promote the safety and soundness of its rms; ii) specically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders; andiii) a secondary objective to facilitate effective competition. The pursuit of these objectivesis supported by the PRAs strategy to delivera resilient nancial sector by seeking: an appropriate quantity and quality of capital; effective risk management; robust business models; and sound governance, including clear accountability of rms management.The PRA does not seek to operate a zero failure regime. When failure does occur, this should be with limited disruption to the provision of core nancial services and without spillovers to the wider nancial sector.The PRAs strategy will be achieved in close cooperation with other parts of the Bank, the Financial Conduct Authority and European and international counterparts. In delivering its strategy, the PRA will be judgement based and forward looking, proportionate in its actions, and efcient in its allocation of resources.Review of 2014/15A One Bank supervisory approach has improved the collaboration and interlinkages between PRA supervisors and other areas of the Bankwww.bankofengland.co.ukStrategic initiativesRegulatory policyFinancial policyInternationalBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/1526 Bank of England Annual Report 2015Review of 2014/15Over the past year, the largest single initiativefor the PRA has been the nalisation and implementation of the EU Solvency II Directive, which encompasses a capital regime for insurers. This is a major change which will introduce a going concern, forward-looking, risk-based prudential regime for insurers that is consistent across the European Union.For banks, the PRA has continued to work on the implementation of the EU Capital Requirements Directive which puts Basel III into place in Europe, on changes to Pillar 2 capital requirements, on depositor protection policy, and on the new liquidity ratios. In the eld of governance, there are major initiatives underway, following the work ofthe Parliamentary Commission on Banking Standards and the ensuing legislation; notably the introduction of the Senior ManagersRegime for banks, and the Senior Insurance Managers Regime.13The PRAs new secondary objective to facilitate competition came into force in March 2014.The Banks Independent Evaluation Ofce is monitoring the PRAs approach to implementing this objective (page 85). The PRA Board has made a full separate report on the delivery of its statutory objectives.13 Supervision of Financial Market Infrastructure (FMI)As well as responsibility for the prudential regulation of individual rms, the Bank also has responsibility for supervising key elements of the United Kingdoms nancial market infrastructure. The Bank is responsible for the supervisionof central counterparties (CCPs), securities settlement systems (SSSs) and systemically important payment systems. The Bank currently has statutory responsibility for ten systems ve payment systems, one securities settlement system and four UK CCPs, in addition to other responsibilities under FMI legislation. The delivery of this responsibility is discharged through the FMI Board, chaired by Sir Jon Cunliffe. Sources: DTCC trade information warehouse reports and Bank calculations. Chart 4: Percentage of gross notional outstanding globally in OTC interest rate and credit derivatives that are centrally-clearedPer cent 6050403020100Dec Aug Apr2012Dec Aug Apr13Dec Aug Apr14OTC interest rate derivativesOTC credit derivatives13 www.bankofengland.co.uk/publications/documents/annualreport/2015/ prareport.pdfBank of England Annual Report 201527The importance of FMIs is increasing given developments such as the G20 initiative to promote the mandatory clearing of standardised Over the Counter (OTC) derivatives. For example, around 50% of the global OTC interest rate derivatives market the largest segment of the OTC derivatives market is now centrally-cleared, compared to 16% in 2007. This will increase the concentration of risk in certainFMIs as well as the nancial stability benets that they deliver. Recognising the increasing importance of FMIs, the Bank has intensied its focus on them. During the past year, as part of its Strategic Plan, the Bank has committed increased resources to its workon FMIs, establishing a new Directorate devoted to risk-based FMI supervision and to providing thought leadership on FMI policy and research. The United Kingdom is home to some of the most signicant FMIs operating in global nancial markets, and the Bank is their lead regulator. Successful supervision of an FMIrelies on effective cooperation with those who supervise the users of the FMI as well as the relevant authorities from the jurisdictions and currencies in which the FMI operates. The Bank attaches great importance to working closely with overseas authorities within and beyondthe European Union, including by chairing and participating in supervisory colleges. The joint announcement, on 29 March 2015, by the European Central Bank (ECB) and the Bankof England of a series of measures aimed at enhancing stability in centrally-cleared markets within the EU is a good example of effective international co-operation in this important area (see box on page 27). ECB and Bank of England agreement on CCP supervisionOn 29 March 2015, the European Central Bank and the Bank of England announceda series of measures aimed at enhancing stability in centrally-cleared markets within the EU, specically:enhanced arrangements for information exchange and co-operation regardingUK Central Counterparties (CCPs) with signicant euro-denominated business; andextension of the standing swap line, should it be necessary and without pre-committing to the provision of liquidity, to facilitate the provision of multi-currency liquidity support byboth central banks to CCPs establishedin the United Kingdom and euroarea respectively.CCP liquidity management remains rst and foremost the responsibility of theCCPs themselves.Review of 2014/1550%Around 50% of the global OTC interest rate derivativesmarket is now centrally-clearedwww.bankofengland.co.ukStrategic initiativesRegulatory policyFinancial policyInternationalBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/1528 Bank of England Annual Report 2015Robust recovery plans and resolution powers are intended to ensure continuity of critical services at FMIs without recourse to public funds. All UK FMIs supervised by the Bank have putin place recovery plans,14 to ensure continuity of service in the event of nancial distress. And UK CCPs have introduced loss-allocation rules both to allocate losses arising from a clearing member default that exceeded prefunded resources and to allocate solvency-threatening investment losses that arise. The UK CCP resolution regime came into effect on 1 August 2014. Other developments include the establishment of a new payments regulator the Payment Systems Regulator (PSR) with a focus on competition, innovation and the interests of service-users. The PSR became fully operational in April 2015. The Bank, FCA, PRA and PSR have agreed a Memorandum of Understanding setting out the high-level framework thatthe authorities will use to co-operate withone another in relation to payment systemsin the United Kingdom. More detail on these and related mattersare given in the Banks Annual Report on its supervision of FMIs, published in March 2015.15Review of 2014/1514With the exception of VISA Europe which was recognisedby the Bank on 19 March 2015. 15The FMI Annual Report is available atwww.bankofengland.co.uk/publications/Documents/fmi/annualreport2015.pdf 16 The Bank has set outits approach to resolutionat www.bankofengland.co.uk/nancialstability/Documents/resolution/apr231014.pdfResolution The Banking Act 2009 created a special resolution regime, providing a permanent framework for dealing with failing UK banks and building societies. The implications of not having such a regime were made clear during the nancial crisis, when it was necessary for the public authorities to intervene to limit the disruption, including by providing public fundsto recapitalise some banks. Subsequent amendments to the regimehave introduced a bail-in tool which was included in the FSBs international standardfor effective resolution regimes and have broadened its scope to include investmentrms and central counterparties. The Bank is the United Kingdoms resolution authority. In October 2014 the Bank set out its approach to resolving a failed bank, building society or investment rm.16 Firms must be able to fail in an orderly way, that is, without excessive disruption to the nancial system, without avoidable interruption to the critical functions that these rms provide, and without exposing the taxpayer to losses. The publication set out the Banks toolkit, and provided detail about how it would be applied. It explained the purpose and objectives of the United Kingdoms resolution regime, its key features, the approach that the Bank would take to resolve a failed rm and the arrangements for safeguarding the rights of depositors, clients, counterpartiesand creditors. The UK CCP resolution regime came into effect on 1 August 2014Bank of England Annual Report 201529Review of 2014/15Specically, the approach document sets out three key stages of resolution which rms would go through. These are:stabilisation phase: Once a rm has entered resolution, the Bank must decide on the most appropriate method to stabilise the rm.This may be through transferring some ofits business to a third party or through bail-in to recapitalise the failed rm;restructuring phase: Once the rm has been stabilised, it will need to be restructured to address the causes of failure and restore condence; andexit from resolution: This is the end of the Banks involvement as resolution authority either the rm will cease to exist or it will be restructured.The Bank Recovery and Resolution Directive (BRRD) came into force in January 2015. This creates some new responsibilities for the Bankas resolution authority, including setting loss-absorbing capacity for individual rms and the power to direct rms to remove barriers to resolution. The BRRD also changes the decision-making process for placing a rm in resolution. Although the BRRD allows for responsibility for resolution and for supervision to be within the same authority, it prescribes that the staff carrying out the different functions should be structurally separate. The Bank has therefore amended the current division of responsibilities and processes to be in compliance with the BRRD. Responsibility for those pre-resolution actions that must be undertaken by the resolution authority has moved to the Banks Resolution Directorate, which will co-operate closely with the PRA in the preparation, planning and carrying out of resolutions, as set out in the BRRD.InternationalThe Banks mission to promote the good of the people of the United Kingdom is not conned by national borders. Prospects for the UK economy depend heavily on developments worldwide. Every year, the United Kingdom exports around 30% of its national output, and around half ofall UK exports go to Europe. The UK economyis characterised by a large nancial sector,with deep connections internationally. And developments in the rest of the world have therefore had, and will continue to have,major repercussions for prospects here inthe United Kingdom. Sources: Bloomberg, Bureau for Economic Policy Analysis, IMF, OECD, ONS, Thomson Reuters Datastream and Bank calculations.(a)Line shows UK GDP growth relative to the average over the period 19882007, which is 3.1%.The contributions of world shocks are relative to model-consistent trend growth rates.Chart 5: Estimates of the historical impact of world shocks on UK GDP growth6420-2-4-6-8-10-121988 2000 02 90 92 94 96 04 06 08 10 12 98World shocksUK GDP (deviation from average)(a)Percentage changes on a year earlierUK GDP (deviation from average)Firms must be able to fail in an orderly way without excessive disruption to the nancial system www.bankofengland.co.ukStrategic initiativesFinancial policyInternationalBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/15Regulatory policy30 Bank of England Annual Report 2015Review of 2014/15Reecting the importance of the world economy and global policy fora to the successful delivery of the Banks mission, the Strategic Plan led to the establishment of a new International Directorate, bringing together experts from all areas of the institution, and creating a team specically dedicated to EU co-ordination and engagement within the Directorate. The new Directorate is helping the different policy areas of the Bank to work together to understand the nature and impact of the global shocks hitting the UK economy, to design appropriate policy responses and to ensure that the Bank is playing a full role on the global stage. Consistent with the Banks focus on analytical excellence, the Directorate is also expandingthe Banks international research effort, withthe aim of positioning the institution at the forefront of understanding the interconnections between global developments and the UK economy and banking system. Speaking with a single, credible voice on international policy is essential if the Bankis to operate effectively on a global stage. As a consequence, it is one of the key initiatives identied under the Banks Outstanding Execution pillar. The Bank is an inuential participant in numerous international and EU fora, and seeks to ensure that it uses its inuence on the global and European stage to deliver on its mission to promote the national good. The Bank has made a number of signicant contributions to international and European policy debates this year, with support and co-ordination from the International Directorate. Following on from the European Commissions recent initiatives aimed at building a Capital Markets Union in Europe, the Bank published A European Capital Markets Union: implications for growth and stability.17 This work illustrates the Banks commitmentto have impact and inuence abroad, grounded in sound economic analysis. Over the past year, there has been major progress towards making the global nancial system safer, fairer and simpler, culminating in the summit of G20 leaders in Brisbane in November 2014. Progress on too big to failThe G20 summit in Brisbane saw world leaders endorse landmark proposals on common international standards on the total loss absorbing capacity (TLAC) required for global systemically important banks (G-SIBs). The proposals developed by the G20 Financial Stability Board under the chairmanship of Governor Mark Carney will establish a level playing eld between banks, and ensure that those shareholders and creditors who benet in the normal course of business also absorb losses when banks fail. The new TLAC standards should providehome and host authorities with condence that G-SIBs have sufcient capacity to absorb losses, both before and during resolution.And they should enable resolution authorities to implement a resolution strategy that minimises any impact on nancial stability and ensures the continuity of critical economic functions, without exposing taxpayers to loss.The TLAC proposals represent a watershed in the quest to end too big to fail the implicit taxpayer subsidy historically enjoyed by the worlds biggest banks.17www.bankofengland.co.uk/research/Documents/fspapers/fs_paper33.pdf30%Every year, theUnited Kingdom exports around 30%of its national outputwww.bankofengland.co.ukStrategic initiativesRegulatory policyFinancial policyBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/15International32 Bank of England Annual Report 2015Review of 2014/15Banking and marketsOpen for businessThe Bank sits at the heart of the UK economy and works closely with rms and intermediaries to safeguard the effective functioning of sterling money markets, as well as to ensure the resilience and effectiveness of payment, clearing and settlement infrastructure. The Banks operations in the sterling money markets have two objectives to implement MPC decisions in order to meet the ination target, and to reduce the cost of disruption to the liquidity and payment services supplied by banks to theUK economy. The Sterling Monetary Framework (SMF) is the Banks published framework that it uses to meet these objectives. Following the Winters Review,18 the Bank committed to publishing each year an Annual Report on the operation of the SMF, designed to increase transparency about this important part of its operations. For the 2014/15 SMF Annual Report,19 the Banks Independent Evaluation Ofce assisted Court in fully engaging withthe assessment of the effectiveness of theSMF. Its highlights are summarised below. Monetary policy and the SterlingMonetary FrameworkThe Banks current approach to implementing monetary policy is known as the oor system and involves paying Bank Rate on the full balances held in reserves accounts. This approach remained successful in keeping sterling overnight market rates close to Bank Rate in 2014/15 (Chart 6).In the minutes of its August 2014 meeting, the MPC noted that the oor system, introduced in March 2009 alongside the Banks Asset Purchase Facility (which purchased gilts and small amounts of high-quality corporate debt), could continue to be used to implement the Committees decisions on Bank Rate in the near term. Looking further ahead, the framework would be reviewed alongside decisions about the future of the Asset Purchase Facility. Sources: Wholesale Markets Brokers Association (WMBA) and Bank calculations.(a) In the brokered secured market, interest rates are represented by the repurchase overnight index average (RONIA), the daily weighted average interest rate of transactions secured against UK government debt, brokered by members of the WMBA. Interest rates in the brokered unsecured market are represented by the sterling overnight index average (SONIA), which is the daily weighted average interest rate of unsecured overnight transactions brokered by WMBA members. For further details on RONIA and SONIA, see www.wmba.org.uk.Chart 6: Spreads of sterling overnight interest rates to Bank Rate(a)Basis pointsUnsecuredSecuredFloor systemReservesaveragingPeak crisis period1501251007550250-25-50-75-100-125-1502002 04 06 08 10 12 1418 www.bankofengland.co.uk/publications/Documents/news/2012/cr2winters.pdf19www.bankofengland.co.uk/markets/Documents/smf/ news/annualreports.pdfThe Bank sits at the heart of the UK economy and works closely with rms and intermediaries to safeguard the effective functioning of sterling money marketsBank of England Annual Report 201533Review of 2014/15Source: Bank of England.(a) Prior to January 2014, the CTRF was called the Extended Collateral Term Repo facility. The FLS (including the two FLS extensions) lies outside the SMF and is not a liquidity insurance facility, but has the result of providing liquidity to the banking sector. There has been no Discount Window Facility usage up to the most recent disclosure point (as specied in the Red Book).Chart 7: Outstanding amounts lent in SMFliquidity facilities and the FLS(a)billionJan 2011Jan 15Jan 13Jan 12Jan 14ILTR CTRF FLS05101520253035404550556065Liquidity insurance and the Sterling Monetary FrameworkIn October 2013, the Bank announced a number of signicant changes to the SMF aimed at increasing the availability and exibility of liquidity insurance to the banking system.The Governor then described the Banks revised Framework as: we are open for business. 469bnThe market value of collateral deliveredto the Bank for actual or potential use inits facilities stoodat 469bnOver the past year, the Bank has extended membership of the SMF to broker-dealers and central counterparties (CCPs), the rst major central bank to extend access to its facilitiesthis way. As at the end of February 2015, 149 institutions were signed up to at least one ofthe facilities that form part of the SMF, up from 139 in February 2014. SMF member banks and building societies now account for 98% of total sterling deposits.The liquidity insurance facilities provided by the Bank of England were used extensively during the nancial crisis. But lending via these facilities has been lower in recent years, reecting the improved nancial positions of banks and building societies, the greater liquidity provided by the Bank through quantitative easing and, more recently, the Funding for Lending Scheme (FLS page 34). As a result, the Banks liquidity insurance facilities continued to see relatively modest use in 2014/15 (Chart 7).The range of acceptable collateral in theSMF continues to expand, both in terms of the range of eligible loan assets and the number of securities deemed eligible. The market valueof collateral delivered to the Bank for actualor potential use in its facilities (such as theFLS and those within the SMF) has increased substantially over recent years, and stood at 469bn by the end of February 2015. The Bankhas also started work to ensure there are no technical obstacles to its ability to accept equities as collateral, should the need arise. In October 2014, the Bank announced thatit would assess the feasibility of establishing Shariah compliant facilities, which would further improve the exibility of the Banks ability to provide liquidity insurance. www.bankofengland.co.ukStrategic initiativesRegulatory policyFinancial policyInternationalBanking and marketsProtecting our banknotesMonetary policyDiverse and TalentedAnalytical ExcellenceOutstanding ExecutionOpen and AccountableFinancial review 2014/15Corporate social responsibilityReport of the Oversight CommitteeFinancial statementsContacting the Bank of England Risk management and business practicesReport of the Remuneration CommitteeReport of the Audit and Risk Committee (ARCo)Statement of the responsibilities of the Court of Directors in relation to the nancial statementsOrganisational structureCourt, and the Banks policy committeesOverviewReview of 2014/1534 Bank of England Annual Report 2015Review of 2014/15BankingThe Banking Directorate operates the UKshigh value payments system (the Real Time Gross Settlement System, see page 36) andacts as the bank within the Bank of England.It is responsible for the Banks lender of last resort function, the provision of Emergency Liquidity Assistance (ELA), and the provisionof bespoke banking services for nancialstability reasons. The Bank has implemented a range of improvements in its approach towardsELA following the independent report byIan Plenderleith in 2012 of the provision of liquidity assistance during the nancial crisis.20 Bank staff have continued to embed these improvements into regular processes during the course of the year. Important examples of this are the annual ELA test conducted by Bank staff and the improved co-operation and information-sharing between the ELA team and other parts of the Bank such as PRA supervisors. As recommended by the Plenderleith Review, Court has been updatedon the readiness of the Bank to provide ELA (page 85). In terms of customer banking, the Banks strategy focuses on those banking activitiesthat enable the Bank to full its responsibilities as the central bank of the United Kingdom. That involves providing wholesale banking servicesto the UK Government, other central banks,and, where there are nancial stability reasons to do so, certain other nancial sector rms.As part of this strategy the Bank also provides custodial services for a range of customers.As of 28 February 2015, total assets held